How can the government fix social security? President Bush made overhauling Social Security a priority for his second term, but momentum and popular support for his proposal for personal accounts have waned. In a special one-hour edition airing Friday, September 16, 2005 at 8:30 p.m. on PBS (check local listings), NOW investigates possible fixes for the ailing system, which is running out of money. NOW’s David Brancaccio conducts a town-hall meeting in a small town to examine the possible futures for people across generations when they reach retirement. Through documentary segments and spirited interaction of town residents, the broadcast lays out scenarios and solutions which are surprisingly different for someone who is 20, 40, or 60 years old.

Voices from the Debate

In the days following the election, President Bush outlined his priorities for his second term. Chief among these is changing the Social Security system. "We will start on Social Security now." said the President. Warning that the process would be long and costly, Bush went on to say "But the cost of doing nothing...is much greater than the cost of reforming the system today."

Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century. The system, however, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security.

President Bush has been talking about revamping Social Security since his 2000 campaign. In his first term he appointed a special commission to study alternative financing systems. Among the priorites listed on the White House site are "expanding ownership of retirement assets, ensuring freedom of choice" and "creating a society of stakeholders."

What the President proposes would change the way Social Security works to permit workers to divert some of their payroll payments into private retirement accounts. Critics call this philosophy "privatization," while proponents refer to such plans as "personalization." Advocates say reform will create an "ownership society," while opponents fear that retirees will be taking on risks now borne by the government.

Analysts note that the President has yet to make specific financing proposals which may involve either cutting benefits to retirees now or in the future, or raising taxes. A choice, says THE ECONOMIST, "between political pain and economic profligacy." THE ECONOMIST speculates that he may wish to leave the actual tough decision-making to Congress.

The numbers from the Social Security Administration are worrisome:

In 2004, more than 47 million Americans will receive approximately $92 billion in Social Security benefits.

53% of the workforce has no private pension coverage.

There are currently 3.3 workers for each Social Security beneficiary. By 2031, there will be 2.2 workers for each beneficiary.

Indeed, the costs of ballooning Social Security obligations, Medicare and other costs  which are part of the equation of federal deficits  are contributing to worries about the strength of the dollar. But the costs of changing the Social Security system are large as well; some estimate between 2 and 3.6 trillion in borrowing over the next decade to continue to pay benefits as monies now paid in by workers are put into the "private" accounts.

The most pressing economic problem facing the United States is the enormous gap it faces with respect to projected spending and receipts. This fiscal gap stands at $51 trillion. It reflects the fact that 77 million baby boomers will shortly begin collecting Social Security, Medicare, and Medicaid benefits, that the current cost of these benefits total $23,000 per elderly, and that this $23,000 figure is rising much more rapidly than are the real wages of the workers paying these benefits. President Bush needs to engage in serious and immediate reforms of Social Security, Medicare, and Medicaid.

Find out more about the issue and the groups lining up on either side and review their arguments.

Pro Privatization/Personalization

Anti Privatization/Personalization

Social Security is going bankrupt. The federal government's largest spending program, accounting for nearly 22 percent of all federal spending, faces irresistible demographic and fiscal pressures that threaten the future retirement security of today's young workers. According to the 2003 report of the Social Security system's Board of Trustees, in 2018, just 14 years from now, the Social Security system will begin to run a deficit. That is, it will begin to spend more on benefits than it brings in through taxes...

But even if Social Security's financial difficulties could be fixed by raising taxes or cutting benefits, the system would still need to be reformed because it is a bad deal for most Americans. Social Security simply costs too much and pays too little. Social Security's rate of return on payroll taxes is dismal (about 2 percent) and declining. Workers deserve a retirement system that will make the most of their money.

Social Security is the Nation's most successful antipoverty program. It has lifted over 11 million seniors out of poverty. The program has been especially important for women. Sixty percent of all Social Security recipients are women. Nearly two-thirds of all women 65 and older get half or more of their income from Social Security. Nearly one-third of those receive 90 percent or more of their income from Social Security.

Without Social Security, the poverty rate for elderly women would be more than 50 percent. It is currently about 12 percent. While this statistic is still too high, it shows how important the program is. But the President and some Members of Congress want to fundamentally change Social Security, preventing Social Security from carrying out its important role... The President suggests that by allowing individuals to divert part of their payroll taxes into private accounts, Social Security will return to firm financial footing and will still be able to continue helping recipients. However, this simply is not true. Privatization will harm Social Security, leaving the well-being of millions of people uncertain. Privatization will likely result in benefit cuts and increase the retirement age for individuals.

Congresswoman Maxine Waters' Congressional Testimony

Lately, ideologically motivated opponents of private sector investments have cited the current recession as 'proof' of the unsuitability of any program that gives workers some control over their own money. However, including the Great Depression and the current economic downturn, a balanced portfolio of 50 percent stocks and 50 percent bonds has yielded an average return of five percent over the last 70 years.

By comparison, a younger man today of about 35, whose earnings are average for his age group, can expect a minus 0.3 percent return on his Social Security retirement savings. That's bad news for the nation's workers, and that terrible rate of return spells disaster for the long-term viability of one of America's most popular programs.

Diverting money away from Social Security and into individual accounts is risky and involves trading some of today's inflation protected, lifetime guaranteed benefit for an account subject to market risk and not guaranteed to last a lifetime or keep pace with inflation. Inflation, market turns or loss of employment can mean that your private account may not have enough money to provide an adequate benefit.

Diverting money out of Social Security into individual accounts worsens Social Security's long-term financial health. Since current payroll taxes are used to pay benefits to beneficiaries, transferring money into individual accounts means that less money will be available to pay promised benefits. To avoid major benefit cuts, younger workers would have to pay twice—once to fund the new account and again to meet Social Security's current obligations.

The Social Security system is expected to begin running a deficit within only 15 years (paying out more in benefits than it collects in taxes). Current estimates calculate that, without reform, it will be unable to pay promised benefits until around 2037. What began as a plan for increased financial security has instead thrown the country towards a future of economic uncertainty.
But when Social Security begins running a deficit in 2014, there will be no more leftovers, and the government must begin paying back its IOUs to keep the system afloat. Because no money has actually been saved for this purpose, Congress will be forced to significantly increase public debt, cut spending or raise taxes.
Raising Social Security taxes enough to keep the government's entitlements promises to future retirees would require doubling or tripling these taxes. That means taking 30 to 40 percent of every worker's wages just to pay retirement benefits.

Those who favor making changes to the current Social Security retirement program are united in their support for the following principles:
1) Permit workers to invest a portion of their Social Security payroll tax (FICA contributions) in individually owned and directed personal retirement accounts.
2) Oppose payroll tax increases.
3) Guarantee a "safety net" (minimum government benefit) for all retirees.
4) Preserve benefits for current retirees and near retirees.

Young workers are intrigued by the idea of diverting their payroll taxes into Wall Street accounts. Privatizers promise ownership of accounts and big investment returns. What they fail to mention are the costs -- increased retirement risks, dramatic cuts in Social Security benefits and a multitrillion-dollar increase in federal borrowing.
There is no free lunch in privatizing Social Security. Diverting money out of Social Security will create an even larger solvency problem. The privatizers fill part of this funding gap by dramatically cutting Social Security benefits for younger generations. They cover the rest by borrowing more money, thereby increasing the burden on young taxpayers by trillions of dollars over the next half-century.

Privatization places much of the risk of a secure retirement on the individual. Young people will not only "own" their accounts, but they will "own the risk" of retirement. Markets go up, and markets go down. Woe be to the person who retires in a falling market. From 1999 through 2002, near-retirees saw the value of their market-invested 401(k) retirement accounts drop an average of 25 percent. A decline such as that puts a big dent in one's projected monthly retirement income.

Additional sources: ECONOMIST, "From Slogan to Legacy," November 11, 2004; "Bush Will Reform Social Security System Now," Reuters, November 4, 2004; "The Next Four Years: A Shift to 'Ownership Society,' LOS ANGELES TIMES, November 7, 2004